Why a Walgreens Purchase of Humana or WellCare Now Appears Less Likely

The reported deal discussions between Walgreens Boots Alliance Inc. (WBA) and drug distributor AmerisourceBergen Corp. (ABC) make it less likely that Walgreens would buy Humana Inc. (HUM) or WellCare Health Plans Inc. (WCG) , according to a stock analyst.

The Wall Street Journal reported Monday, Feb. 12, that representatives of Walgreens CEO Stefano Pessina reached out to representatives of AmerisourceBergen chief Steven Collis several weeks ago regarding the possibility of purchasing the remaining portion of the company that Walgreens doesn't already own. Walgreens had a stake of about 26% in AmerisourceBergen as of end-November.

The reported early-stage talks "are not entirely surprising from our managed care perspective, and reduce the likelihood that WBA would be an acquirer of [Humana] or [WellCare] as we have speculated as a strategic response to" CVS Health Corp.'s (CVS) $69 billion deal to buy Aetna Inc. (AET) , wrote Leerink Partners LLC analyst Ana Gupte on Monday.

A Walgreens spokeperson declined to comment on the WSJ report and on Gupte's comments. An AmerisourceBergen representative said it is the company's policy not to discuss any rumors or speculation regarding potential mergers or acquisitions. A representative for WellCare said the company does not comment on merger or acquisition speculation. A representative for Humana did not immediately respond to a request for comment.

Shares of AmerisourceBergen closed at $97.77 on Tuesday, up 9.3%. Shares of Walgreens finished the trading session at $68.29, down 0.3%.

In a note, Mizuho Securities USA LLC analyst Ann Hynes wrote that ABC could be sold for at least $107 to $109 per share. "Given ABC's high-quality industry leading specialty distribution business, the high-end of the range is possible," Hynes wrote. That would translate to an estimated Ebitda purchase multiple of 10 times, which Hynes thinks is a fair multiple "despite some industry headwinds (e.g. drug pricing) given pricing trends appear to be stabilizing, coupled with ABC's strong cash flow generation and industry leading specialty distribution business."

A potential union between Walgreens and AmerisourceBergen is "timed right as a response to the increasing competition and pressure from other vertical integrations across the healthcare industry, especially the CVS-Aetna announcement," said Brad Haller, M&A director at consulting firm West Monroe Partners. Compared to the CVS-Aetna deal, there are more immediate margin and synergy opportunities in a Walgreens-AmerisourceBergen combination, Haller said, noting that AmerisourceBergen is the primary distributor for Walgreens and Walgreens already has a stake in the company.

For his part, Jefferies LLC analyst Brian Tanquilut said that although an AmerisourceBergen acquisition would be accretive to earnings per share and enable Walgreens to take advantage of its strong free cash flow and balance sheet, "the rationale for such a deal is a bit of a headscratcher as WBA and ABC already have a JV that affords both the strategic value that combining would provide."

-- Stephanie Gleason contributed to this article

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